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XL Group PLC (NYSE:XL)

Q4 2010 Earnings Call

February 8, 2011 05:00 pm ET

Executives

David Radulski – Director, Investor Relations

Mike McGavick – Group Chief Executive Officer

Irene Esteves – Chief Financial Officer

Dave Duclos – Chief Executive, Insurance Operations

Jamie Veghte – Chief Executive, Reinsurance Operations

Sarah Street – Chief Investment Officer

Susan Cross – Executive Vice President, Global Chief Actuary

Analysts

Vinay Misquith – Credit Suisse

Jay Gelb -- Barclays

Brian Meredith -- UBS

Jay Cohen – Bank of America Merrill Lynch

Keith Walsh – Citi

Mike Nannizzi – Goldman Sachs

Cliff Gallant – KBW

Josh Shanker – Deutsche Bank

Matthew Heimermann – JP Morgan

Ian Gutterman – Adage Capital

Jon Newsome – Sandler O’Neill

Doug Mewhirter -- RBC Capital Markets

Greg Locraft – Morgan Stanley

Operator

Good evening. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the XL Group Fourth Quarter and year end Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Please be advised this conference is being recorded.

I would now like to turn the call over to David Radulski, XL Director of Investor Relations. Please go ahead.

David Radulski

Thank you, Lisa. Good evening. And welcome to XL Group’s fourth quarter and full year 2010 conference call. This call is being simultaneously webcast on XL’s website at www.xlgroup.com. We posted to our website several documents including our quarterly financial supplement and our fixed income portfolio data.

On our call today, Mike McGavick, XL Group CEO will offer opening remarks; Irene Esteves, our CFO will review financial results, followed by Susan Cross, our Global Chief Actuary, who will discuss our reserving process and recent development. Dave Duclos, our Chief Executive of Insurance Operations; and Jamie Veghte, our Chief Executive of Reinsurance Operations, will then review their segment results and market conditions, and then we’ll open it up for questions. Sarah Street, our Chief Investment Officer is with us today and available for Q&A.

Before they begin, I’d like to remind you that certain of the matters we’ll discuss today are forward-looking statements. These statements are based on current plans, estimates and expectations. Forward-looking statements involve inherent risks and uncertainties, and a number of factors could cause actual results to differ materially from those contained in the forward-looking statements and therefore you should not place undue reliance on them.

Forward looking statements are sensitive to many factors including those identified in our annual report on Form 10-K, our quarterly reports on Form 10-Q, and other documents on file with the SEC, that could cause actual results to differ materially from those contained in the forward-looking statements. Forward-looking statements speak only as of the date on which they are made and we undertake no obligation publicly to revise any forward-looking statements in response to new information, future development or otherwise.

And with that, I turn it over to Mike McGavick.

Mike McGavick

Good evening. To open, I’d like to note that on this call, we’ll be structuring it a bit differently than we have on prior calls. You can expect this new template to be followed into the future. Three changes are most prominent. First of all, in the past I’ve opened with a talk that was mainly a regurgitation of the numbers that appear in the public materials that you have just received. As Irene Esteves has moved in from being our newest team member to being a real leader in our financial operations, I think it’s appropriate to have Irene go through these numbers and offer more granular commentary. So we’ll have Irene taking that part of my presentation into hers.

Second, these being the days of tough, soft markets, I think it’s appropriate to make available to you on a periodic basis our Global Chief Actuary, Susan Cross. Obviously attention to reserving is always important, but that’s particularly a focus on reserving during this stage of the cycle. Now I wanted to make sure she was available, because frankly, in this space, I feel XL has a great story to tell. We are very diligent and prudent reservers, and I think that’s holding this company in good stead.

The final change in these calls is I think it’s best if I focus my remarks on what we think about the five key drivers of shareholder value, and developments related to those five drivers during the quarter. We’ll follow this template into the future with, I hope, monotonous success. The five drivers of shareholder value that I’ll be focusing on are first of all, of course, underwriting excellence. Second, opportunities for strategic growth, third our strong risk management of the enterprise, fourth on optimizing our investment portfolio, and then fifth on operating and capital efficiency. So those are the five areas where I’ll bring forward some highlights of the quarter, and then Irene will take you into the details. Susan Cross will then provide the promised perspective on reserves, and then of course Dave and Jamie will talk about their respective operations.

So first, let’s start with underwriting excellence, the first of the five drivers that I mentioned. In a quarter like this, when our underwriting operations provide a 91.4% combined ratio, and a 94.8% combined ratio for the year, we are very pleased with the underwriting performance of the company. This was led by outstanding performance in our reinsurance operation, though I’d be quick to point out that a primary contributor to our results was, once again, prior year development, which reduced the current quarter by a combined 9.5 points. This is quality underwriting over time, and we feel good both about our results for the quarter and our results over time as reflected in this prior year development. This resulted in an annualized operating ROE of 10% for the quarter and 9% for the year.

The second thing I would comment on is strategic growth. First, our top line had a managed amount of year over year growth, but we did have some increases in Q4 because of an innovative coverage we developed for a large insurance client, that was booked in this quarter. In other areas of strategic growth, we are constantly reviewing opportunities to expand into new lines and geography that we believe will add value. In Q4, this included receiving our license to offer primary insurance in Chinese markets, and adding experienced teams in several new lines of activity for XL, including construction and surety. We also recently promoted Greg Hendrick, a proven underwriter, and former leader of our very successful remuda reinsurance businesses to report to me as the head of strategic growth, searching for new opportunities to apply XLs talents.

The third item I mentioned that I would comment on is our disciplined enterprise risk management. Since we last talked to you, I would note that we had a review, a report card of sorts, from Standard and Poor’s, that saw them increase our rating on enterprise risk management from adequate to strong, putting XLs ERM in the top quintile of companies that they rate. So this overall grade and advance for XL is terribly important as we seek to put the dark days of the (inaudible) explosions behind us, and really strive to have our arms around, completely, what it is we do. We’re very pleased with this achievement, and very proud of the work that Jacob Rosengarten and his entire team, and of many people involved in this across XL, and the progress we have made. As a side note, I would also mention that in the same period, S&P revised its outlook overall for XL to stable, and referred specifically to our strong franchise, strong operating performance, and strong, in fact in their words, extremely strong, capital position.

In the quarter we did see some other illustrations of our strength in ERM. One of the things we focus on is when catastrophes do happen, what do we know about it? What do we know about XLs exposure, and how good are we at getting it right as quickly as we can? Our New Zealand earthquake experiences are a case in point. We’ve seen a lot of changes around the market in estimates around New Zealand losses. Our case has been somewhat different. Our original loss estimates for the September earthquake have held up well, and we have strengthened our $44 million loss estimate by only $3 million in the quarter. This speaks well for our ERM efforts, our knowledge of what events will cost, and what they will cost XL. And of course, it speaks well to the sophistication and effectiveness of our claims people on the ground.

Now, while speaking of catastrophes, let me comment on the Australian flooding. Here, we’ve had a relatively modest $23 million of loss in Q4. Based on the preliminary data available to us, we would expect Q1 ’11 losses to range between an additional $75 and $95 million for the firm. Again, we take real pride in knowing that we can get these things right, and we have reason again to be confident in these numbers as well. Another part of risk management, of course, is focusing on our core businesses and removing distractions. We had another success in this space when we recognized a gain from the sale of the majority of our investment in Primus, and we continued in the quarter to reduce exposures in our financial guarantee portfolio.

The fourth driver that I mentioned, our investment portfolio, you may recall that in previous quarters as interest rates fell and we had positive marks to market, I mentioned that we’d expect the pendulum to swing back as interest rates rose, and we saw a modest example of this effect in Q4. Overall, in the investment portfolio there’s relatively little news. We continue our pursuit of optimizing that portfolio, we’re no longer in our all out repositioning, we’re simply working to optimize the portfolio.

The fifth area I would comment on is our operating and capital efficiency. Now here we are continuing to reap the benefits of previously announced efficiency initiatives, and our operating expenses are lower year over year on both the ratio and absolute dollar basis. The benefits we sought were fully recognized, but we are not standing still. For example, as you know, we are one of the handful of companies with a strong presence in the global program business, but we feel we can improve both our offerings and our efficiency, so we are reorganizing that operations to capture even more efficiency in our platform, and we think we can have it as an even more solid base for growth in future.

Now when I talk about expenses, know that we will not shy away from making investments if we believe it’s the prudent way to prepare for new opportunities, and you will see an uptick in our expense rate in 2011, as we install the systems we need to achieve both greater efficiency into the future and create a platform from which we can grow as market conditions allow. We’ll be sharing more examples and specific details of these kinds of initiatives over the course of the year, and we are making plans for an Investor Day sometime around mid-year, when we can give you more specific detail around these announcements.

Now these soft market conditions also require diligence in managing our invested capital, and as we said before, until we find appropriate investment opportunities, we remain committed to returning excess capital to our investors. In this quarter, we had an additional $250 million in share repurchases since we spoke with you last, and we have about $750 million remaining in our current authorization. So with our drivers of shareholder value, those five I’ve just mentioned, all moving in the right direction, we believe we have put XL in a strong position to ride out the soft market storm and to profit from the opportunities improved conditions will bring, while still knowing it’s our job to improve the company every day.

Before I turn it over to Irene, a couple of other things. As you know, we dedicated to applying best practices throughout our company. We’re expanding that to our guidance policy as well. In the past, at this time of year, I would have given you some high level views on what we expected to happen in the future, but frankly I find the volatility in our industry makes it very difficult to give you meaningful predictions. As we have asked representatives from across the investment community, they have shared with us that they find guidance to be a rapidly declining value, as they rely on their own models and the transparency with which we present ourselves. We’ve heard that providing you with timely and responsive disclosures is more useful than conjecturing about what will happen a year from now. We’ve decided to accept this advice, and we will forego providing formal guidance now and into the future.

I will close on market conditions. In the end, I cannot tell you when a market will turn, but I can tell you about our book of business and a few things that we are encouraged by. First, we have seen some early indications of improving economic activity, especially in the US, where some of our clients, remembering that they tend to be larger, more complex institutions, have predicted some exposure growth for themselves, as we have negotiated their insurances. This is good, and it’s the first time we’ve seen it in several years. The story for Europe is more uneven, with Germany continuing to perform strongly, and others, particularly the UK, performing weakly. In the emerging markets, while it’s a relatively small part of our books in terms of originations of writing, we do see the kinds of growth you’d expect, and we’re excited about what acquiring our Chinese license and other activities in Brazil can bring, and we think we have opportunities, real opportunities to participate in these growing markets.

As you’ll hear from Jamie, we see some good signs from the reinsurance operation as well. So with all of that said, you can expect me to use this five part framework to update you each quarter, and with that I’ll turn it over to Irene to go through the notes. Irene?

Irene Esteves

Thanks Mike, and good evening. Overall, we had a strong quarter driven by a 91.4% combined ratio, and despite historically low investment yields, operating income for Q4 was $242 million or $0.74 per fully diluted share, with an annualized operating ROE of 10% for the quarter and 9% for the full year. P&C gross premiums written for Q4 were up by 13.8% year over year, excluding one large multi-year agreement, P&C gross premiums written were largely stable year over year, with moderate business growth in international professional, specialty, and other property insurance lines, offset primarity by fx movments. P&C net premiums earned increased by 2.2%, because as we had communicated before, a smaller percentage of bound policies over the last year were long term in nature.

Prior year development in Q4 was a favorable $122 million, or 9.5 loss ratio points. Our detailed round up reserve reviews resulted in favorable development of $66 million 16:01

Of $211 million in Q4, was 9% lower than the prior year, as portfolio yields were driven lower by US interest rates. New purchases were mainly in high quality investment grade corporate credits. The average new investment rate on our core P&C portfolio was 2.7%, reflecting a modest increase in absolute rates. The duration of our P&C portfolio increased somewhat from the previous quarters 2.7 years to 2.9 years, and the P&C portfolio book yield, net of expenses, was 3.1%. As of yearend, the gross book yield on the P&C portfolio was 3.5%.

The unfavorable mark to market of $417 million in Q4 was driven by rising US interest rates, partially offset by modest US spread tightening. This movement brought our entire available for sale portfolio into a net unrealized loss position of $153 million. Net income from investment fund affiliates was down $5 million, but our investment manager affiliates performed well, generating $25 million. It’s important to note that the $56.1 million gain that we recognized from the sale of 76% of our interest in Primus was not included in operating income, since we had previously not included the impact on operating income when we wrote that investment down at yearend 2007.

As you see from our press release, we continue to actively manage our capital, and in Q4 we bought back 11.8 million shares at an average cost of $21.29 for a total of $251 million dollars. Since the beginning of this year, we have purchased another 4.7 million shares for $106 million. The buyback since we restarted our program in August 2010 have totaled 30.4 million shares, or 9% of the beginning shares outstanding. As planned, the buybacks to date offset the dilution from the mandatory convertible preferred that will convert to a maximum of 30.4 million common shares in August of this year.We have $750 million remaining in our current buyback authorization, and we will continue to actively and prudently manage our capital base.

Slide six shows the growth in our book value per share. For the year, we are up 21%, driven by the rebound in our mark to market and net income. While the negative mark to market in Q4 had an impact, it was offset by our net income and the share buybacks. So as you can see, we’re delivering on our areas of focus for building shareholder value, supported by our dual top platform, we’re delivering strong overall underwriting results. We are not reaching for yield with an aggressive portfolio, we’re managing business risks and being diligent with our expense base, and actively managing our capital levels. While demonstrating this operating discipline, we’re also preparing ourselves for market turn by investing for strategic growth.

Let me now turn it over to Susan Cross to discuss our reserving process and our reserve levels.

Susan Cross

Thanks Irene. I’m going to cover two aspects of XLs reserving discipline with you this evening. First, an overview of our reserving process and how it impacts our (inaudible). And second, what this process has contributed for our current reserves. We conduct detailed reserve reviews for all of our business lines at least twice a year. The reviews are granular, with over 150 reserving profiles defined by element such as product line, geography, attachment level, and program. We consider growth, seeded, and net data separately.

For the majority of our business, these reviews take place in Q2 and Q4, based on data from the end of the prior quarter. We supplement these semi-annual comprehensive reviews with reviews of actual loss emergence relative to expected levels, which we do for all lines on a quarterly basis. These semi-annual reviews mean that the most significant adjustment to prior year development are typically reported in our Q2 and Q4 financials. We may also true up current year loss ratios in Q4, as we look back at full year experience.

In Q4 of each year, we have historically included updates to loss ratios on property and other short tail reinsurance business, written in the previous underwriting year, as this business matures. In Q3, we have recognized final, reinsurance to close bookings on whole account reinsurance business written for Lloyd’s syndicate, which for the past several years have resulted in favorable prior year developments.

In addition to our internal efforts, we engage both an independent actuarial firm to review our reserves on an annual basis, and our auditors, who conduct their own tests and reviews as appropriate. These external reviews provide a valuable perspective on industry profitability levels and loss trends, which are particularly useful at inflection points in the underwriting cycle. So what did we learn from all of these reviews in 2010?

First, our internal reviews resulted in us recognizing favorable prior year development of $122 million in Q4, bringing the full year prior year development to $373 million, which is 2.2% of reserves held at the beginning of 2010. This is consistent with our experience over the past four years, where favorable prior development has ranged from 1 to 3% of beginning of year reserves. For insurance, releases in Q4 totaled $66 million and were largely driven by favorable experience in professional. Most notably, in the 2007 and prior report years, for non clash D&O losses, as well as favorable clash development on report years 2006 and prior.

We made no changes to our clash provisions for 2007 through 2009 years, which cover sub-prime and (made off) exposures, and in fact, we incorporated a further reserve provision for potential clash exposure in 2010. Yet there were some reserving profiles we deemed it appropriate to strengthen. These were excess casualty, which was impacted by a large claim in 2007, a discontinued surety program, and a number of smaller profiles. For reinsurance, released in Q4 totaled $56 million, with over two-thirds from property and other short tail lines.

This is consistent with the full year 2010 experience, where 60% of the $245 million of favorable prior year development related to property, and other short tail lines. We continue to be cautious with respect to casualty reinsurance reserves, particularly in the US, due to uncertainty associated with the longer reporting and settlement patterns of this business. During 2010, we released just $19 million of reserves in the 2003 and subsequent underwriting years, as we believe it prudent to allow the favorable actual versus expected experience that we have observed through 2010 to continue seasoning.

I hope this helps you understand why we believe XLs reserving process is robust. Internal and external reviews, comprehensive price monitoring, and a philosophy of prudence in the face of uncertainty are key components of managing reserve risk at XL. And now to Dave, to discuss results in the insurance segment.

Dave Duclos

Thanks Susan. Our Q4 insurance results continue to be impacted by a very competitive marketplace, especially in the large client segment, where we focus. The insurance segment’s combined ratio for the quarter, of 101%, was three points higher than Q4 2009. Adjusting for prior development, this segment’s Q4 combined ratio of 108.3% was 8.7 points higher, year over year.

This increase was largely due to the following; first, our current year net cat losses for the quarter were $15 million, compared to a release of $9 million in Q4 2009, a 2.7 point change. The recent Queensland flood accounted for the majority of this impact. Secondly, we exited and re-underwrote certain lines of business, which accounted for 1.2 points of the deterioration. This negative effect is temporary, and makes our book of business one that we believe will be more profitable in the long run.

The remainder of the deterioration came predominantly from our excess casualty and property lines, where we experienced a small number of high severity non cat losses. It is important to note, however, that this increase in inflated due to the particularly low level of property losses in Q4 2009. This underwriting result deterioration was partially offset by favorable acquisition and operating expenses, which resulted in a 2.6 point improvement year over year for the quarter.

Our year to date accident year loss ratio, ex cat, of 70.8% was 1.9 points worse than prior year ratio, due to the same reasons; exited businesses and a small number of high severity non cat losses. We see no reserving trend in the loss producing accounts, just the nature of a sometimes lumpy business and the inevitable effect that flat to slightly negative pricing has on profitability.

Now to the premium story. Excluding the large premium transaction that was previously mentioned, gross premiums written for the year were up 1%, and for the quarter increased 6.7%, or $68 million, with the majority of this organic growth coming from selective initiatives in our more profitable businesses, including international professional, instruction, and our marine lines. Regarding our professional lines book, while class action filings got off to a slow start in 2010, they did accelerate in the second half of the year, catching up to historical averages.

Developments like robo-signing, the recent increase in some foreign companies names in industry SEC class action suits, and the fact that over 60% of the credit crisis related lawsuits remain unresolved, continue to support our careful and cautious view on reserving. Moving on to market conditions, there’s not much to add that you haven’t already heard. It remains a very competitive market, and as I mentioned earlier, particularly challenging to the large client segment, where pricing pressures remain most severe.

While our retentions and submission flow remain strong in most of our businesses, soft pricing means we must remain extremely diligent in our selection of new risks. We continue to focus on select growth initiatives, including the recent announcements of our North American construction and surety business, our expansion into China and the addition of several new programs. We also continue to strengthen our team with the most recent additions being Jim Tocco, who will head our North America Property and XL Global Asset Protection Services operations. We do expect to continue adding industry talent to an already strong global team.

Our experience so far in 2011 allows some optimism. In our international P&C business unit, where nearly 40% of our book renews on January 1, we experienced strong retentions across all product lines, including 86% on an account basis, and 90% based on premium, and initial pricing indications are broadly stable. We do believe we’re in a better position heading into the new year than we were 12 months ago. Actions that we’ve taken to increase efficiency and build on our underwriting capabilities, while remaining disciplined, mean we will be in a position to take advantage of improvements in market conditions when and where they occur.

And now to Jamie, to discuss reinsurance.

Jamie Veghte

Thanks Dave, and good evening. The reinsurance segment had an excellent result in Q4 on both the calendar and accident year basis, in market conditions that remain very challenging. Our combined was 69.7% for the quarter, and included the benefit of prior year releases of $56 million. This compares to a combined ratio of 92.6% in Q4 2009. Excluding the benefit of prior year reserve releases, we achieved a very strong combined of 84%, which compares to 97.1% in 2009.

For the full year, XL re had a combined ratio of 80.1%, which compares favorably to the 82.1% combined in 2009. Excluding prior year releases, the combined for 2010 was 96.4%, virtually flat to the 2009 figure of 96%. Turning to top line, gross written premiums in the quarter were $97.5 million, a 27% reduction from the $133.4 million written in Q4 of 2009. For the full year, gross premiums written were $1.8 billion, a 1% reduction from 2009.

The reduction in the quarter was driven largely by XL re-America, and resulted from lower sessions on a property program, lower written premiums in our heartland crop facility, and cancellation of a substantial casualty quota share treaty. Overall, we view the underwriting performance in 2010 as outstanding. We are particularly gratified by the fact that virtually all business units had very strong combined ratios, with only Latin America producing an underwriting loss, which is understandable given the substantial market loss from the Chile earthquake.

Our Bermuda, Asia/Pacific, America, and European teams all had superb years, with combined ratios of 51%, 70%, 88%, and 77% respectively. This level of performance is a validation of our long term emphasis on underwriting discipline, and an excellent underwriting staff worldwide. As respects our team, its depth was demonstrated in a significant way this quarter, with the appointment of new leaders of two of our business units. Charles Cooper will lead XL re-Bermuda, and Philippe Rochaix will now head up our Latin America unit, having previously worked in both Europe and Asia/Pacific for XL. This action results from Greg Hendrick’s new role that Mike mentioned previously, and Steven (Enoutabridge) moving on to other responsibilities within XL.

Turning to market conditions, I had a look at my remarks from our conference call a year ago, and I frankly struggle to deliver a message today that is any different. I reported then that our January 1 renewal was competitive, but orderly, and that’s precisely what took place at this yearend.

On the short tail side, US cat pricing was down on a risk adjustment basis, between 7 and 10%, and the international markets were off by 5%. There was plenty of capacity for the largest programs to get in place. Major market events such as Chile and Deep Water had limited impact outside of the markets they directly affected.

However, customers that got too aggressive with their pricing demands struggled to get programs finished. On the long tail side, terms and conditions held up well. However, given the structure of these deals, the health of the market remains heavily dependent on pricing conditions on the primary side of the market.

Overall, the renewal season went about as we expected, from a pricing perspective. In general, good deals got done fairly easily, and bad deals did not get finished. Despite this landscape, we were able to utilize our capacity, and found new opportunities in most of our business units.

Of particular note was XL re-Europe, which found opportunities in the UK motor and marine markets, and put on significant new business. In Bermuda, we were able to find some new catastrophe opportunities, and in the US we also wrote selected new business opportunities on both the property and casualty side. With that, I will turn it back to David for Q&A.

David Radulski

Lisa, can you please open the line for questions?

Question-and-Answer Session

Operator

Yes, thank you. (Operator Instructions.) Your first question comes from Vinay Misquith, with Credit Suisse.

Vinay Misquith – Credit Suisse

Hi, good evening. On the primary insurance side, the combined ratio on an accident year basis was about 104.6, and ex-cat was 100.8, how do you look at the profitability of this business right now and going forward?

Dave Duclos

Vinay, this is Dave; first of all, let me be clear. These kind of underwriting results are certainly disappointing to us, but I want to make sure that I give some perspective relative to what we’ve experienced in 2010. The first half of the year was marked by Chile, and we do write catastrophe business, so that’s a loss that we would expect, but other than that, actually the attritional loss ratio behaved and practically all of our lines. In the second half of the year, we did see some, as I said, some severity in non cat activity, specifically in two lines of business; our non US property and our excess casualty.

We have continued to analyze and monitor the book of business, and feel very good about the quality. Now does this look like a lot of commercial books needs rate? I think you can define our book in three categories. Some of book needs rate, some of our book needs to maintain rate, and some of our book probably still have some rate leeway, if you will, and still produce attractive returns. So I want to say that the actions we’re taking the last couple of years aren’t fully reflected in the loss ratio, we continue to do analysis, and frankly, while I’m disappointed because we didn’t make an underwriting income, we’re not alarmed and know the drivers and are very much focused on making sure we get the rate that’s going to produce the accident year results that we’re projecting for 2011.

I guess the last comment I’d make about this is we’re being real. We’re not kidding ourselves around our current year loss picks, and you’ve heard other companies comment on trend in this area, and we feel very good about the projections. Not just what we’ve just announced for 2010, but also our expectations around 2011. But it is a competitive marketplace, one that we feel very good about the quality of the book, and also the continuing remits based on the actions we’ve taken in the last couple of years.

Vinay Misquith – Credit Suisse

Fair enough. Given the way the stock price is trading and the situation on the excess capital level, do you think it makes more sense to write more business in the segment as you’re doing right now, or how do you look at it like that, versus buying back your stock?

Mike McGavick

Vinay, this is Mike; you know, first I think I would sum up Dave’s comments by noting that as we go back through where we had these pops, we write lumpy large lines of business, so there’s going to be periods like that, just like in ’09 there was a really, really quite year. We’re just going to have these things.

When we go back and review, we didn’t find anything out of order with our underwriting process. Generally speaking, where you see us seeking to grow, it’s where we believe we have an opportunity to write at levels that reflect our capital goals. So we would put our money to work only where we see real opportunity, where we see adequate rate, and we see real prospects for that market over time.

So that, of course, we’ll put money behind opportunities like that, and over time, we believe that will be positioning the insurance book to be more profitable, as the effects of exited lesser performing lines wear off. So that’s a remix that I think investors should hope for, and that we’ll keep searching for. When we don’t see opportunities that are commiserate to the amount of capital that we have, then we turn to that next level, which is the share repurchasing. As you’ll note, we’ve been active and continue to have room in our authorization.

Vinay Misquith – Credit Suisse

Fair enough. On the question of share repurchase, I was a little surprised that you only bought back $250 million, given the size of the excess capital. Could you comment on the size of excess capital you have, and what if any, of a negative impact it’s having on your ROE right now? Thanks.

Mike McGavick

Sure, Vinay, we’ve never commented within any specificity around our excess capital, as you call it, there are people that have noted to us repeatedly over the last year that with the significant improvement in our capital position and with the reductions in writings that were reflected in some of the discontinued activity that Dave referenced, there’s been an assertion to us that there must be some room. Certainly I think our buybacks reflect that at least in some part we agree, but we have not chosen to be specific about our plans for repurchases. We prefer to do it in an orderly basis, and in a basis that will least impact the ordinary daily trading out there, and that’s the approach we’ll continue to take.

Vinay Misquith – Credit Suisse

Okay, that’s great. Thank you.

Operator

Our next question comes from Jay Gelb with Barclays.

Jay Gelb -- Barclays

Thanks, and good afternoon. Mike, can you give us a bit, or perhaps Dave, can you give us a bit more color on the multi-year deal you did, and is this something that we should expect more of from XL? And the second question for Mike, with the company generating a 9% operating return on equity in 2010, what do you think is a reasonable expectation as the market continues to soften, here?

Mike McGavick

Yeah, Jay, first on your first question on the multi-year program that was written, we can’t and do not comment on specific accounts by name, but we can give you a little bit of detail around the financials of the transaction. This was clearly a unique opportunity; one of the things we’re proudest of is it really reflects XL’s willingness and reputations for writing creative and complex risks, and while we can’t plan on deals like this, we do expect to see similar opportunities into the future, but Dave, maybe you can give a little more information around the financials of it.

Dave Duclos

Sure Jay, this is written on a primary casualty form, and it provides coverage for 10 years, and it acts as a product warranty cover for what is in essence a technology play. As Mike mentioned, it’s a sizable premium, it’s in excess of $100 million, and in terms of replicating this success, we do have opportunities emerging where we can see similar products being made available, and I think the key thing that Mike mentioned, it’s a result of our reputation in Europe and our willingness to be innovative in terms of crafting coverage that fits the client’s needs.

Mike McGavick

Jay, with respect to your second question, again, we’re not going to be giving a guidance, including ROE guidance. We’ll continue, as I mentioned a moment ago, we’ll target those areas for growth where I think our technical underwriting skills give us the best opportunities to drive pricing and meet our (inaudible). We’re going to manage the capital side of the equation as well, as we have been doing. But the only general comment I’ll make is as we look at the market and where things have been trending, we see that the analyst community has broadly been forecasting industry ROEs in the kind of mid to high single digits, and with our ’10 performance on the books, it’s hard to take any difference of opinion from what I see the analyst community broadly saying about what the sector will be producing.

Jay Gelb -- Barclays

Right, thank you.

Operator

Our next question comes from Brian Meredith with UBS.

Brian Meredith -- UBS

Yeah, good evening. A couple of things here. Can you just comment a little bit, Jamie, you mentioned about the heartland quota share going away, I’m just curious for our purposes, as we look at that, how much premium is that going to be going forward, and have you just gotten completely off the heartland business?

Jamie Veghte

Let me walk you through a couple of things around that, Brian. In 2010, our gross writings were $245 million. We do rely on both the government and the proportional reinsurance market heavily in that class, so our net earned premium 2010 was $64 million. In addition, because of the structure of the SRA with the Federal Government, the business is actually still ours for 2011. It will not go to the new owner until 2012. Finally, we reached an agreement with the new owner where in exchange for them becoming a substantial proportional reinsurer of us in 2011, we will have an option to reinsure them to a level in 2012. So A) on a net basis, it’s not a significant impact, and B) whatever impact we feel will probably not be fully borne for a couple of years.

Brian Meredith -- UBS

Okay great, and just one other quick question on the multi-year deal. Just more from an accounting perspective, you said it’s a pretty significant premium, so is that just a one time shot? And it’s a 10 year deal, I thought was what you said, so is it earned over a 10 year period?

Dave Duclos

Brian, this is Dave. It was booked on a written premium basis in Q4 2010, but it earns over the 10 year policy period, yes.

Brian Meredith -- UBS

Okay, okay, so that’s that. And one last quick one. On the life operations, was there any kind of reserve releases there? Because it seemed like income was up pretty substantially from Q3.

Mike McGavick

No, Brian, no reserve releases in that business.

Brian Meredith -- UBS

Okay, thank you.

Operator

Our next question comes from Jay Cohen, with Bank of America Merrill Lynch.

Jay Cohen – Bank of America Merrill Lynch

Hi, I had to jump off for a second, I don’t know if you gave this, if you did I can follow up. But on the multi-year deal, did you give us the actual dollar amount that represented?

Mike McGavick

Jay, no I didn’t. I just referenced it as being over $100 million. Not the specific amount.

Jay Cohen – Bank of America Merrill Lynch

For modeling purposes, it would be helpful to have that, simply because we have to earn that out over 10 years as opposed to four or five quarters.

Mike McGavick

Okay, in the spirit of full disclosure, $126 million.

Jay Cohen – Bank of America Merrill Lynch

Great, that’s helpful, thank you. And then secondly, you mentioned some of the growth came in professional lines in Europe. Can you talk about what kinds of professional lines you’re writing there, and how that business might differ from the typical US professional lines that we’re used to looking at?

Mike McGavick

That’s a great question, and I think it’s a combination answer here. We’ve got the traditional D&O business that we obviously made a name for ourselves and a strong book here in the US. We’re writing that broadly in Europe. We’re also writing some specific classes on an E&O basis, we just opened up an opportunity, an operation that’s going to focus on design professional, which is another well built US practice, so I guess the broad answer is it’s a combination of the same kind of mix that you see in the US, and that growth is coming from not only Europe, broadly, but also Asia. The one thing I would say is we’ve added a lot of good quality underwriters through 2010 and Bernie and team have added more than a half a dozen capable underwriters that now are manning our various desks in London and Paris. So we feel good about the penetration, but it’s a fairly broad, diverse book, similar to what you see in the make up in the US.

Jay Cohen – Bank of America Merrill Lynch

Great, thank you.

Operator

Our next question comes from Keith Walsh with Citi.

Keith Walsh – Citi

Hey, good evening everybody. First question, for Mike, at a time when pricing seems very difficult, I’ve seen a flurry of press releases from you guys in the last four months or so, a lot of investment in people. Maybe if you could just talk about that a little bit, the philosophy there, short term and long term, the objectives.

Mike McGavock

Sure, we are very fortunate at XL to have very talented, technical underwriters around the world, but we’re never of the opinion that we can’t get better. So we are always going to be looking for talented individuals and teams who we think can add in those areas where we think we can either take advantage of what we think are more acceptable rates for the risks, or areas where we think being positioned now will be important over time. So each story, each individual, or each team would have its own story behind it, but the basic theme is we know that there are areas where we can achieve appropriate returns and we want to expand our achievement of them, or we know there are places where we know we can improve and we find someone who we think really brings additional capability and insight to the firm to grow forward.

You know, the ones that we’ve emphasized over recent quarters is the build out of construction in the US and the surety team. Anybody who knows the backgrounds of the individuals involved knows that we have found some of the real leaders in the market, and when we look at what’s going on in forecast construction spending, or US Government intentions, we see a lot of opportunity to be a meaningful player in something that we think will be more and more meaningful over time. So that’s just an illustration of looking at how the world is going to play out, looking how we’re positioned and making sure that we have great people able to take advantage of it. You know, our general philosophy is quite simple; we think that talent is central to the competition and we want to always be willing to build out our investment and talent in order to take advantage of both current and future opportunities.

Keith Walsh – Citi

Okay, and then – oh, I’m sorry.

Dave Duclos

I was just going to add two quick comments. The majority of the adds to staff, in addition to the areas that Mike alluded to also support the comment I made earlier about the international professional build out, so there’s a correlation between where you see new business success in 2010, where we’ve invested in new people. And the other comment, I’ve mentioned, because you have to be prudent at this point in time of the cycle, we’ve made all these hires and we’ve managed our overall expense and head count budget, so we’re doing it the right way.

Keith Walsh – Citi

Okay, and then second question for Susan Cross. You know, just thinking about frequency trends; I guess we’ve been on a downward slope for the last several years, but how do you account for this in your inputs? Thinking about that trend, especially at a time when just listening to the other underwriters talking out there, there’s talk that this could be flattening, or even ticking up. So how do you think about that? Maybe some sensitivity around that issue.

Susan Cross

Right, sure Keith, as you can appreciate we do monitor our life trends pretty carefully, and we certainly have seen some evidence of potential increases in frequency trends in the property and casualty, although we’re just starting to see some signs of that in 2010, and I think that’s one of the reasons that we’ve looked at the 2010 launch ratio pretty carefully, as we finished out our year. We continue to monitor that. So I’d say property and casualty, we’ve been looking at those frequency trends; in professional, although we have seen some signs of some lower frequency trends. So it really depends on the line of business, and we do monitor it carefully and reflect it in our current loss ratio fix.

Keith Walsh – Citi

Okay, thanks a lot.

Operator

Our next question comes from Mike Nannizzi, with Goldman Sachs.

Mike Nannizzi – Goldman Sachs

Thank you very much, a have a number of questions if I could. On the operating affiliates slide, what amount of that $75 million is in operating income, and can you just kind of talk about what happened there in the quarter? And then I have a couple of follow-ups, thanks. Hello?

Sarah Street

If you actually look at – I’m just trying to actually find the page here, our financial supplement, the one that’s called Net Income from Operating Affiliates – the investment manager affiliate, the $25 million number, is definitely in operations earnings. And then the rest of it isn’t, the financial and other strategic investments is excluded.

Mike Nannizzi – Goldman Sachs

Okay, so the 74.7 – about $25 million is in net operating income, and the other 50ish is not.

Sarah Street

In round terms, yes.

Susan Cross

The Primus gain was $51.6, that’s not included in operating income. Everything else would be included.

Mike Nannizzi – Goldman Sachs

Okay, great, thanks. And then just an expense question, you mentioned some new technology that would kind of run through the expense line in ’11, and then the headcount that you added; I just want to think about how you’re thinking about that line and in terms of the new teams, are they generally profitable now? If you were to peel them out, and if not, how long do you think it will take to get them there, given where the market is right now?

Mike McGavock

A couple of things. First of all, again, we made very significant progress in our expense line over the last several years, fully achieving the savings that we had forecast through those two restructurings. This year, even though as Dave said, we have added some people and teams, it has been within the budgets that were already built for those years. So those did not reflect increased expense on a total basis. Having said that, the new teams, it really would depend on which story. Some of them paid for themselves, or can pay for themselves quite quickly, because of opportunities that we’ve identified.

In other cases, it would take a couple of years to get those operations fully built out, so it really would depend on which individual team and what’s the story behind that business. Stories that we would be very uncomfortable, at this early stage, revealing to our competitors, so we won’t get into those details at this time. I did mention that we would make some investments around systems. This is, by the way, consistent with the past, even in the last couple of years when we were reducing expenses, we were investing in new claims system, the build out of which was completed last year, on time and under budget, I might point out.

Actually a little ahead of time and under budget, and we do have a few ideas for how we can continue to build greater long term efficiency through investing in technology and that will give us greater growth potential when appropriate in the market, and as I said, we will get into more detail around those, more granularity in the course of the year, in particular mid-year when we get to that Investor Day. But our discipline remains rock solid. We have the soft market playbook out and fully operational, we believe in very disciplined underwriting and driving price as hard as we can, and monitoring our expenses with real frugality. The only thing where we will go outside of that is if we can see a real benefit and return to the firm, with a very reasonable payback period.

Mike Nannizzi – Goldman Sachs

Great, and just one more if I could, just on the portfolio. Where are you in terms of kind of re-risking that book, in duration to 2.9, with a book that seems to be shifting more toward the primary side, maybe more on the casualty side, does that duration start to creep out, or any thoughts on that side of the fence would be great. Thank you.

Mike McGavock

Yeah, I’ll ask Sarah to make any specific comments she wishes; I would just say in general we’ve been working toward this kind of duration level for some time and have no plans to significantly alter it. And generally speaking, of course, as you would know, going back over the last several years, our drive was to move to a more conventional portfolio and away from the more structured products that had caused us some challenges back during the credit crunch. We’ve been very successful, though not yet complete in that drive, but at this stage it’s a very orderly process of working that position down as opportunities reveal themselves, and trying to stay ahead, as best we can, of new market phenomena, as we were mostly successful doing with respect to European financials explosion. So we feel very good about the way we’re managing that portfolio, and we’re going to continue to optimize it. Is there any others you’d add?

Sarah Street

No, I have nothing to add. The extension of the duration this quarter would perhaps be really be putting a little bit more of the cash that we had sitting on the sidelines back to work, but probably now it’s a level that’s going to stabilize, so you’ll see some market movement probably in some of our agency mortgages, interest rates go up and down, that can move our duration around, but no significant plans to change it, as Mike said.

Mike Nannizzi – Goldman Sachs

So no significant sales of assets and reinvestments, just investing runoff and new cash proceeds?

Sarah Street

No, we’re tweaking on the margin. We’re working through all the assets when we find good opportunities, but no significant changes in investment strategy. With the exception of equities, we are under weight equities at this point, and as we reduce some of our legacy assets, we will build up the equity portfolio, but that’s going to be slow and over time.

Mike Nannizzi – Goldman Sachs

Thank you for answering all my questions.

Operator

Our next question comes from Cliff Gallant, with KBW.

Cliff Gallant – KBW

Thank you, I think most of my questions were asked. I was going to ask about the equity portfolio, but it seems like you just answered that. How about January 1 renewals, as a buyer of reinsurance? Is there anything we can expect when we see Q1 results?

Mike McGavock

Cliff, nothing really out of the ordinary. You’ve got a combination, some of our treaty actually reduced in price. One notable treaty went up and it’s been broadcast by other companies, and that was marine, and that was specific to the deep water event. So it’s a mixed bag. I would say, as a buyer, I come out slightly happy compared to what we had planned for, which probably Jamie doesn’t like to hear, but it’s – I would describe it as prudent. Obviously the marine area, in particular, in trying to get rate rise given the exposures that were highlighted with deep water makes sense. In some other lines, there’s still some competition for the business.

Cliff Gallant – KBW

Okay, thank you.

Operator

Our next question some from Josh Shanker, with Deutsche Bank.

Josh Shanker – Deutsche Bank

Good evening everyone. Two questions; the first one, I don’t mean to belabor the multi-year contract, but as you know as outside analysts, we hear the words multi-year contract, and it makes us a little nervous. If you can explain anything, without betraying anything of the client, how it comes to – you put together a 10 year price and why that’s not a risky contract? Explain just a little about the inner workings of that type of a business that you’re writing.

Mike McGavock

I’m sorry, I don’t think it’s really possible for us to get into the reasons that we were comfortable with this kind of risk without giving you detail that would betray our agreements to confidentiality. So it is – it’s so in the nature of the risk, why we were comfortable, that I think it’s just not possible. Sorry.

Josh Shanker – Deutsche Bank

Is it possible that the price would ever change, depending on the loss experience of this product?

Mike McGavock

The answer is no. No. Let me also, let’s put this aside, and let’s talk about long term agreements. Just so there’s a comfort here. You know, we’ve talked about how much long term agreement business XL insurance had written, and I just want to give you a couple of numbers. In 2010, we ended up writing $2 million in long terms agreements for our property and casualty book, largely out of Europe, and that’s compared to $25 million that was written for the previous year. For the full year of 2010, we wrote $50 million in what we call long term agreements, and that’s down from a high water mark, if you will, of $631 million in 2008. So I guess I want to make sure that this account opportunity was really a specific opportunity for us to apply our innovation and ability to solve a client need and it doesn’t represent sort of the standard approach to how we think about putting long term agreements out in this marketplace.

Josh Shanker – Deutsche Bank

Okay, I appreciate your clarity on the matter. And the second question involves the very good result in the reinsurance segment. It’s stripping out the cat experience and the favorable development, as an accent period loss ratio you had about 46/46%, which is far better than anytime I can really go back, and I have a model that goes fairly far back. What’s happened with business mix or what’s going on there to make it so much better than what we’ve seen previous quarters in the years?

Mike McGavock

This particular quarter there were a large number of reasonably small items that contributed to the improvement. Just to put it in context, if you strip out mat cat and prior development, we had a combined of 80.5%, which is about a 15 point improvement. The three biggest components of it were in 2009 we had $11 million of losses from our old structured product unit. In 2009 we also wrote off some very, very old recoverable from an old macri of $8.6 million, that obviously is non-recurring. In the current year, our A versus E on property in the US was very favorable in that it contributed a $10 million improvement. And there was a number of other smaller items that contributed a million or two million dollars here or there. If you add it all up, it was this huge improvement.

Josh Shanker – Deutsche Bank

Can we think about –

Mike McGavock

I would say, and we have emphasized this on the call over the last couple of years, is that as the market has softened, the percentage of property tax business has increased substantially in the overall portfolio, and obviously you’re going to have up years and down years in that portfolio, but as a percentage of the whole, it’s virtually doubled from where it was in 2005.

Josh Shanker – Deutsche Bank

As I’m thinking forward, you think the last nine months of the year or the first three months of the year are more indicative of the margins in the unit?

Mike McGavock

Well, let’s go over the year to date numbers, because I think that’s probably more indicative of the numbers. On a year to date basis, going through the same exercise, if you strip out mat cat and prior year releases, we had a combined ratio of 85.8% compared to 93% in 2009. Again, we had financial solution losses in 2009 which were $21 million; we had a very large fire loss in 2009 which was $11 million, and going back to the A versus E on the property side in XL was another $10 million. In addition, there was some impact on business mix. We have a line called other, which you may have seen, which is principally our London market whole account business. That portfolio has dropped off; in 2009 it was $170 million at a loss ratio of 74, in 2010 it was down to $112 million at a loss ratio of 69. So there were a number of issues, again on a year to date basis, that contributed. But I think broadly, if you looked at that sort of delta on a year to date it would be more representative of the overall situation than just Q4.

Josh Shanker – Deutsche Bank

Thank you for clarity.

Operator

Our next question comes from Matthew Heimermann, with JP Morgan.

Matthew Heimermann – JP Morgan

My questions have been answered. Thanks, have a good night everybody.

Operator

Our next question comes from Ian Gutterman, with Adage Capital.

Ian Gutterman – Adage Capital

Hi, good afternoon, good evening, I guess. First, from Mike, can you tell me – I’m just intrigued by this office of strategic growth, can you tell me one, just how does that operate, so that Greg isn’t sort of stepping on Jamie or Dave’s toes? And b) more importantly, should I be excited about an office of strategic growth in a soft market that seems to have trouble finding its bottom?

Mike McGavock

Well, Ian, first of all, not to be too delicate about it, I expect Greg to step on Jamie’s and Dave’s toes, in the most collaborative possible way. We keep talking about waiting for a turn, and all of that, but in the end we have to operate the business as though these are conditions in perpetuity. That’s why we have to continue to look for ways to invest in our expenses so that we can actually lower those expenses over time. It’s why we have to continue to be very disciplined about where we will put our underwriting expertise to work, and it’s why we have to continue to fight the notion that there’s nothing we can do. There are pockets of appropriate returns, and we should be seeking to make sure that we get as fair a share of those returns as XL can.

There are sectors of the economy that we see as more active and opportune than others, so it really is about how do we always be thinking about what can we bring, what can we innovate, what can we challenge ourselves to bring to bear in the market and make XL shareholders more money? When we don’t think we can do that, we purchase our shares. So it’s really about having a mindset that is always challenging ourselves to do better, no matter what the external conditions may be. It’s unacceptable to just sit and wring your hands and say it’s a lousy market.

It’s more appropriate to always be scanning that market for what are often small but nice opportunities. And we see that at XL and we’re going to exploit it at XL. I’m particularly delighted that Greg’s the one doing it. This is a seasoned underwriter, and Greg is a seasoned business person. He thinks about it from a business perspective, he thinks about it over time, and he knows that the fundamental use of our shareholders capital is to make them money. So I’m – you’ll react in whichever way you want, but from my point of view, I think that challenging of ourselves is inherent in building a great business over the long haul.

Ian Gutterman – Adage Capital

That makes a lot of sense. I guess what I’m trying to think through is what’s considered success for him, I guess. In this kind of market, if he looks at 100 things, and says I can only find one, is that good, or does he have to find 10 good things for it to be a success?

Mike McGavock

No, no, the only real measure of success will come over time, on the bottom line, and there’s no – we never put in place a top line goals. All of our goals and all of our compensations are designed around combined ratio, ROE, and bottom line. So there’s no – if he were to say to us, “I have scoured and scoured the planet, and there’s nothing we can do right now.” we’d obviously challenge to look at what he looked at, and then we’d say “Good job, keep looking.” Because there’s got to be something. So it’s not about top line growth. It’s about adding to the profits of the company. Where there’s opportunity there is, and where there isn’t there isn’t. We’re patient about this. There’s no short term imperative of any kind.

Ian Gutterman – Adage Capital

Okay, perfect. I just wanted to make sure that hadn’t changed. And then for Dave, you mentioned in a couple of places about excess casualty loss. I think some in this quarter and I think Susan mentioned some in the adverse development. Can you just talk about what’s going on in excess casualty? Is there anything that makes you a little nervous there? That tends to be usually a harbinger of reserve problems for the industry.

Dave Duclos

Well, I don’t know about the harbinger of reserve problems for the industry, but I do know that we’ve had two quarters now where we’ve had an uptick. I wouldn’t call it a trend, we’re looking at the book carefully. It is associated with a class, I mentioned this during the Q3 call, there’s quite a few of the losses that are related to the energy area, so it’s energy driven in the excess casualty space, and as I’ve mentioned before, we feel good about the quality book of business, and we’re looking right now at how we use capacity, where we attach our limits, the rate on line, but it’s not an area that we’re going to run away from, because frankly XLs made its mark in the energy area in a number of lines, including excess casualty.

It’s something we’re carefully looking at, and I would say that’s a line in some cases where we certainly want to make sure that we push rate appropriate. I would point out that one of the ways we’ve managed this over the last 18 months, if you look at the premium, the premium is bound, both in 2009 and 2010, but that’s the primary driver of that excess casualty result.

Ian Gutterman – Adage Capital

Okay, and then just lastly for you, I’m doing really quick math here, so I know I might be a little bit off here, but if I look at the yearend premiums for your book for the year, about $2 billion is in casualty, and about $1.5 billion is property or short tail, so it’s a little bit more than 50/50, sort of mid long tail, if you will.

I was just trying to do the math on how that gets to an accident year that’s over 100, because I would have thought that short tail stuff would be closer to 90, and the mid to long, especially considering some of it is professional line, shouldn’t be a whole lot over 100. It implies either the short tail is closer to 100 than I think, or the professional lines are at like 110 or higher. Is there something I’m way off on there?

Dave Duclos

No, that’s a good point, and it’s not the professional book. The professional book is performing well. We did have, I referenced this in my opening comments. In addition to the excess casualty line, we also had property non cat losses and our attritional loss in ratio is running a little bit high. So our short sales performance, and I’d say this is maybe more of a non US impact, but our North America property’s holding up pretty good, but we have had some poor experience and some losses on an international basis.

The same comment I made earlier about excess casualty, the kind of business we write, we’re going to see the lumpiness, if we will. Now again, I can’t every quarter keep talking about lumpiness, so that’s why we’re looking at actually the two areas we’re looking at. Not looking at from a standpoint of planning on exiting, quite frankly, we’re looking at it to figure out how we can solve a profit problem and also increase our ability to write business longer term, would be property and excess casualty.

Ian Gutterman – Adage Capital

Okay, so with that, hopefully (inaudible) works with math. If I look at – if I were to be able to see your expected accident year for year, your insurance business this year, your actual came in above expected for the year, just due to natural volatility?

Dave Duclos

That’s fair.

Ian Gutterman – Adage Capital

Okay, great. Thank you.

Operator

Our next question comes from Jon Newsome, with Sandler O’Neill.

Jon Newsome – Sandler O’Neill

Good evening, and thanks for the call folks. The thing I’m having the most trouble in my modeling scheme getting right is the pace of the buyback. I was wondering if we start with the assumption that I have a view of what the excess capital is, or what the available capital is for buyback, how should I think about the sensitivity of the pace of buyback? Is it more the average daily trading volume, and capacity for – there’s a limitation there for number of buybacks.

With the cash flow so it slows down Q3 when I think of cat losses coming through. Should I think of it a bit more as a reflection of the stock price, the stock price goes down, your buybacks accelerate? How should I think about the limiting factors that affect the pace of what you’re doing when you return capital?

Mike McGavock

You know, this is something that we review with our Board on a regular basis, and make judgments about the appropriate levels of repurchases. So the very narrow kind of daily factors that you cite would generally not be driving us. It’s generally a broader view of the capital position of the firm, our opportunities to put money to work, and then decisions we would make to repurchase. So it really is a broader set of questions that we regularly review with our Board.

Jon Newsome – Sandler O’Neill

So it’s more a matter of you’ve got x amount of money that you want to return, and then you just go ahead and do that without these other sort of –

Mike McGavock

Those other things, again, those are factors you would consider, but those are more factors about how we might enter the market at a particular time, as opposed to the broader question of how much is it that we are seeking to return during a period, and why. And those are broader questions as I say, and we’ll continue to evaluate them and do as we see fit in the future.

Jon Newsome – Sandler O’Neill

Okay, I’ll take it offline, but I’m not actually asking about the broader questions. I think you’ve been very clear about that. I’m actually about more the implication questions, but I can ask later.

Susan Cross

The execution of it does take into consideration we’re trying not to move the stock price, obviously. We’re trying to buy at the most reasonable prices, so the issues that you state are taken into consideration in how we execute against what the Board has approved.

Jon Newsome – Sandler O’Neill

Okay, thanks guys.

Operator

Our next question comes from Doug Mewhirter with RBC Capital Markets.

Doug Mewhirter -- RBC Capital Markets

Hey good evening. I just really had one question. The Australian flood losses, you had some in Q4 and you expect some in Q1. First of all, anticipated Q1 losses, what’s a rough division between insurance and reinsurance? Is the vast majority in reinsurance?

Mike McGavock

No, the majority would be in insurance.

Dave Duclos

We probably have three-quarters of the total that we’ve got up for that estimate that Mike referred to earlier. As Mike mentioned, with the experience that we’ve had for the last several years in particular, we feel pretty good about the estimate. Given our book of business, we don’t have thousands of claimants, we actually have on the ground in Australia right now our global claims chief, as well as our global property chief, and they’re meeting with large risk CFO and risk managers, so we’ve got 31 insurers that have a variety of claims, and we’re in the process of assessing.

Doug Mewhirter -- RBC Capital Markets

And I guess the following question to that, on the same topic, and I guess the real answer you may not be able to really disclose it, because it gets into client relationships, but there was a bit of controversy I think in the reinsurance industry about one event versus two events, and which program to put this on. Did you actually claim it as two separate events, or was it sort of one more continuous thing, and you sort of had a negotiation to parse it out between your last year’s program and this year’s renewing program? And also, did that then have an effect on the renewals, which are sort of negotiations going on at the same time?

Mike McGavock

First, with respect to any individual client or to our reinsurance clients in particular, the definition of events would be specific to each contract, so there’s no one size fits all answer to that here at XL. The one thing I can say is respect to our insurance estimate, that doesn’t touch our cat treaty at the current time, and we don’t expect it to, so that particular debate wouldn’t be material.

Doug Mewhirter -- RBC Capital Markets

Okay thanks, that’s all my questions.

Operator

Our next question comes from Greg Locraft, with Morgan Stanley.

Greg Locraft – Morgan Stanley

All mine have been answered. Thank you.

Mike McGavock

Great, I believe that completes the question and answers we had in queue. We thank you for the questions and the diligence behind them. We look forward to working with you in the days ahead to answer any more specific or offline questions that you may have, as best we can. We feel very good about this quarter, we’re always looking for things to improve, and we certainly plan things we can improve. But this is a time of optimism at XL, you can see that people are betting their long term careers with us, which we very much appreciate. We think the general talent of the company is high and getting higher, and we’re very excited about what that means over time for our shareholder’s earnings. Thanks again for your time, and we’ll look forward to talking to you over the course of the quarter, and of course at the end of the next. Thanks a lot.

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Source: XL Group CEO Discusses Q4 2010 - Earnings Call Transcript

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